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Factors Expected to Influence Microchip (MCHP) in Q4 Earnings

Zacks Equity Research

Microchip Technology Incorporated MCHP is scheduled to release fourth-quarter fiscal 2019 results on May 8.

The company has outpaced the Zacks Consensus Estimate in the trailing four quarters, with an average positive surprise of 5.38%.

Past-Quarter Performance

In the last reported quarter, the company delivered third-quarter fiscal 2019 non-GAAP earnings of $1.66 per share, surpassing the Zacks Consensus Estimate by $1.57 per share. The figure improved from $1.36 per shares reported in the year-ago quarter.

Revenues increased 42.4% from the year-ago quarter to $1.416 billion on a non-GAAP basis. The figure also marginally outpaced the Zacks Consensus Estimate of $1.402 billion.

What to Expect in Q4

Microchip recently provided an update on fourth-quarter fiscal 2019 outlook.

The company now anticipates fourth-quarter revenues to be in the band of $1.279 billion to $1.375 billion, compared with prior range of $1.251-$1.403 billion. Management notes that it is revising the range of revenues, as it is skeptical of whether there will be addition or reduction in inventory levels at its distributors in the to-be-reported quarter.

The Zacks Consensus Estimate for revenues is pegged at $1.33 billion, indicating growth of 32.6% from the prior-year quarter.

Non-GAAP earnings per share have now been forecast in the range of $1.30-$1.49 per share, compared with the previously guided range of $1.26-$1.53.

The Zacks Consensus Estimate for earnings is pegged at $1.39 per share, indicating a decline of 0.7% from the year-ago quarter.

Microchip’s CEO, Steve Sanghi believes that excluding further negative developments pertaining to trade war between the United States and China, “the March 2019 quarter will mark the bottom of the current cycle for Microchip.”

Coming to share price performance, Microchip stock has gained 40.1% in the year-to-date period, substantially outperforming the industry’s rally of 37.1%.

Let's see how things are shaping up prior to this announcement.

Factors to Consider

Microchip’s strength in microcontroller business is likely to be key growth driver in the quarter under review. Portfolio expansion across majority of the operating domains bode well. Notably, the company is now focusing on improving driving experience to strengthen its position in producing autonomous vehicle controllers, which in turn will aid the upcoming quarterly results.

The company recently partnered Google Cloud to launch the latest AVR-IoT WG Development Board with a fully certified Wi-Fi network controller to provide a simple and effective way to connect embedded applications.

Microchip unveiled the first RISC-V SoC Field Programmable Gate Array (FPGA) architecture. The company also announced the availability of Intelligent Network Interface Controller networking (INICnet) technology to support all data types, including audio, video, control and Ethernet, over a single cable.

Further, the company introduced the single-chip MXT2912TD-A and MXT2113TD-A for touch screens up to 20 inches in size. Microchip announced availability of MPLAB X Integrated Development Environment (IDE) version 5.05 that supports AVR MCUs. We believe these product rollouts are expected to positively impact the top line in the to-be reported quarter.

Moreover, the company unveiled the PolarFire FPGA burst mode receiver (BMR) solution primarily for 10G passive optical network execution. The new solutions are anticipated to generate incremental revenues, consequently favoring the top line. Notably, the Zacks Consensus Estimate for microcontroller revenues is pegged at $703 million for the fourth quarter, representing an improvement of 7% from the year-ago reported figure.

Acquisitions like Microsemi, SMSC, ISSC, Micrel and Atmel have expanded Microchip’s product portfolio and will aid the upcoming quarterly results. Strong demand for Microsemi’s solutions in Data Center, Communications, Defense & Aerospace markets will also aid the Q4 results.

Further, collaborations with the likes of Amazon’s and Sony augur well for the company. Notably, the company has collaborated with Amazon Web Services (AWS) to support AWS offerings and develop secure cloud systems.

Robust collaborations and strategic buyouts are anticipated to aid the company in expanding business and total addressable market (TAM), consequently favoring the top line.

However, increasing lead time, slim demand trends in ZTE and Bitcoin business domains are headwinds. Further, imposition of tariff owing to trade war between the United States and China has been taking a toll on chipmakers for a while now and remains a concern.

What Our Model Says

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.

Microchip has a Zacks Rank #3 and an Earnings ESP of 0.00%. This makes surprise prediction difficult. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Stocks With Favorable Combination

Here are some stocks worth considering as our model shows that these have the right combination of elements to deliver an earnings beat in the upcoming releases.

Here are a few stocks that are worth considering as our model shows that these have the right combination of elements to deliver an earnings beat in the upcoming releases.

Electronic Arts Inc. EA has an Earnings ESP of +11.35% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Northern Oil and Gas, Inc. NOG has an Earnings ESP of +1.67% and a Zacks Rank #3.

Wynn Resorts, Limited WYNN has an Earnings ESP of +2.98% and a Zacks Rank #3.

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